MarkitSERV sees 48% clearing volume rise

Aug 27, 2013
MarkitSERV sees 48% clearing volume rise

Post-trade processing specialist specialist MarkitSERV has seen a jump in buy-side subscriptions as Dodd-Frank Act rules mandating post-trade reporting and clearing of OTC derivatives kicked in.

The firm also saw a significant jump in use of its clearing connectivity service, which processed over 600,000 trades between March 11 and the end of July.

In anticipation of new clearing rules, the volume of trades submitted for clearing through MarkitSERV leapt up 48% from the same period in 2012. This figure includes more than 120,000 “client” trades, those in which at least one party is not a member of a clearinghouse. Over 300 new buy-side subscribers signed up after they were phased into the regulations requiring the post-trade reporting and clearing of certain OTC derivatives in June.

MarkitSERV recently added LCH. Clearnet to its roster of clearing providers in June. Other CFTC-registered derivatives clearing organisations (DCOs) with connectivity to MarkitSERV include CME, ICE Clear Credit, ICE Clear Europe, LCH.Clearnet’s SwapClear US and UK, and Options Clearing Corp.

It is also linked with Eurex Clearing AG and LCH. Clearnet-owned CDSClear, which both have DCO applications pending.

The mandatory clearing of certain OTC derivatives, including interest rate swaps and credit default swaps, came into effect on 11 March and is being implemented in three stages. Most buy-side firms were required to comply with the rules from 10 June.

Henry Hunter, managing director and head of product management for MarkitSERV, said: “The CFTC’s Category 2 deadline affected a large number of firms and the industry has accomplished a lot in a short time. MarkitSERV gives customers a practical cross-asset solution that helps them process, clear and report OTC derivative transactions.”

Welcome to the Cleared Swaps World – Sign Here, Please

Welcome to the Cleared Swaps World – Sign Here, Please

The final wave of the swaps clearing mandate will hit in September. But entering into a clearing agreement doesn’t mean swaps trading will be risk-free, as CCPs hold the potential to be an extraordinarily risky part of the market.
As the last customer types prepare for the clearing of swaps in September, people are becoming more aware of the implications of clearing agreements and the relationships among the customer, his FCM and the CCP. However, there are a few reasons to be particularly careful in executing clearing agreements.

As a bit of background, the requirement to use CCPs actually serves to concentrate counterparty risk, at least for large players. Imagine a swap dealer (SD) that has $100 billion in exposure to 1,000 separate counterparties, converting that to $50 billion in exposure with each of two CCPs. Clearly, there has been a significant concentration of risk. Not a problem if the CCP is risk free; but a potential problem if it isn’t.

[Related: “A Familiar Model Emerges for Swaps”]

Now let’s look at the market – not the market for swaps or even clearing services, but the market for CCPs themselves. If a significant number of CCPs are chasing a finite volume of clearing, we might expect them to find ways to compete. One of those ways might be in initial margin, particularly on bespoke products. This “race to the bottom,” if it surfaces, could easily make CCPs an extraordinarily risky part of the market.

Finally, we need to understand the nature of financial panics. They always begin as muffled rumblings in the distance – trouble for someone else but not for us. Then the trouble spreads, and the market starts buzzing with rumors. At some point, the trouble reaches a tipping point, and everyone rushes to get out. At that point, it may be too late to save anyone’s bacon, no matter whom they clear through.


In light of all this, the International Organization of Securities Commissioners (IOSCO) and the BIS Committee on Payment and Settlement Systems (CPSS) have jointly issued a consultation document they call “Recovery of Financial Market Infrastructures.” In the introduction they say, “‘Recovery’ concerns the ability of a Financial Market Infrastructure (FMI) to recover from a threat to its viability and financial strength so that it can continue to provide its critical services without requiring the use of resolution powers by authorities. Recovery therefore takes place in the shadow of resolution.” In other words, this document addresses the worst of all worlds for market participants.

The report spends the first 10 of its 23 pages talking about recovery planning, certainly an important requirement. But then the report gets into recovery tools, and here’s where it really gets interesting. In Section 3.2 the report says, “FMIs can be exposed to legal, credit, liquidity, general business, custody, investment and operational risks. … The manifestation of the risks may have different causes and may also result in different types of failure scenarios.”

But the most startling section of the report is Section 3.5, “Tools to allocate uncovered losses caused by participant default.” This gets into the very difficult subject of who pays when a large default exhausts the CCP’s resources. Things get really interesting in Section 3.5.14, where the report says:

“An important example of a position-based loss allocation recovery tool is variation margin haircutting by CCPs. When haircutting variation margin, the CCP reduces pro rata the amount it is due to pay participants with in-the-money (net) positions, while continuing to collect in full from those participants with out-of-the-money (net) positions… Where a CCP does not have a direct contractual relationship with indirect participants (ie clients of direct participants [or customers of FCMs]), the impact on such indirect participants will depend upon their contractual arrangements with their respective direct participants.”

So if you have a winning position with the wrong CCP – one that might clear for a big loser or two – you might not get some of your winnings.

The final wave of the swaps clearing mandate will hit in September. But entering into a clearing agreement doesn’t mean swaps trading will be risk-free, as CCPs hold the potential to be an extraordinarily risky part of the market.
And this vulnerability isn’t restricted to VM. In a paragraph that has garnered lots of publicity, Section 3.5.19 says:

“Initial margin haircutting could be limited to the initial margin of direct participants. On the other hand, the tool could be applied to the margin of all participants (direct and indirect) providing this is consistent with the laws and regulations to which the CCP is subject and the rest of the CCP’s rules. Like variation margin haircutting, even where the CCP applies margin haircuts only to direct participants, the contractual arrangements between direct participants and indirect participants may cause the haircutting to have an impact on indirect participants.” (Emphasis added)

So if a market participant has a winning position, but clears at a CCP that is in trouble, not only could the market participant’s VM be withheld, its IM could also disappear into the financial black hole. Not a pretty thought!

Some Legal Advice

So it is especially welcome that attorney Sherri Venocur has written an informative article called, “What Customers Should Look Out For in FCM Clearing Agreements.” In one section, she cautions:

“Section 724(a) of Dodd-Frank restricts an FCM’s use of its customer’s collateral and specifies the instruments into which an FCM may invest its customer’s collateral. Nonetheless, most Clearing Agreements give the FCM the right to rehypothecate collateral and otherwise to deal with it as though it were the FCM’s own property… Thus, customers should push for the inclusion in the Clearing Agreement of a provision containing language similar to that in the proposed rule, and it would seem unreasonable for an FCM not to agree to include it.”

Another point Ms. Venocur makes is that banks that are FCMs often have many affiliated entities that perform related functions, such as trading, lending, or money transfer. A clearing customer may have relationships with some of those affiliates, so, she says:

“It is most important for the customer to understand the possible consequences of [any] cross-affiliate provisions in light of the customer’s particular circumstances. To that end, the customer should: (i) review the customer’s existing relationships with the Bank and inquire about anticipated future relationships; (ii) review all documents relating to such relationships; and (iii) based on this review, (A) understand what actions the Bank can take with respect to the customer or its property in the event the customer defaults or another circumstance occurs that gives the Bank the right to take certain actions (either specified or described broadly in the documents) and (B) understand what remedies are available to the customer in the event the Bank breaches its obligations under its various agreements with the customer or the customer otherwise wishes to terminate one or more relationships with the Bank.”

In conclusion, Ms. Venocur says:

“The implementation of Dodd-Frank and the regulations promulgated thereunder marks a radical change in the way OTC derivatives are executed, documented and implemented. While ISDA Master Agreements continue to be required, customers also need to execute Clearing Agreements with FCMs so that they can enter into derivative transactions that are subject to the mandatory clearing requirement. It is essential that customers understand the risks within Clearing Agreements and negotiate these agreements with their FCMs in order to reduce or at the very least, to manage, such risks.”

Technology, Transparency and Choice Drive Buy Side’s Investment in U.S. Options

Technology, Transparency and Choice Drive Buy Side’s Investment in U.S. Options

Volumes in the options market are estimated to increase by more than 5 percent as electronic trading fuels access to the U.S. marketplace.
The U.S. market for exchange-traded options took off during the past decade. The buy side is increasingly looking at options as instruments to hedge risk exposure and generate alpha, according to TABB Group’s recent report on the state of the U.S. options markets. In fact, TABB estimates that volumes will increase by more than 5 percent by year-end, even as market volatility wanes. So what is continuing to fuel growth in the options markets?

[Related: “Buy Side Is Getting Smarter at Trading Options”]

Market transparency and growing adoption of electronic trading technologies are key contributing factors. The changes in regulation and increasing use of electronic trading helped raise volume an average of 21 percent a year from 2000 to 2010 on seven U.S. options exchanges. Today, the options markets are supported by 12 exchanges and electronic venues where traders can access legitimate, reliable prices and order information so they can confidently and quickly execute a trade.

While the increase in trading venues has increased competition and lowered transaction costs for investors, fragmentation has also forced continued investment in technology on both the sell side and buy side. One area of investment on the buy side is platforms that help aggregate liquidity across multiple counterparties and exchanges. To access liquidity and capitalize on momentary market opportunities, institutional investors are adopting electronic platforms that offer integrated pricing monitors, trade analytics, risk monitors, and other tools. For the second year in a row, TABB’s study found Bloomberg Execution Management System (EMSX) is the most popular electronic trading platform for U.S. options. Now, I may be biased, but what I believe this reveals is that options market participants value unparalleled technology and transparency – but they also value choice.

With trading volumes stagnant in the past few years, the buy side has also sought to balance technology and commission spend with necessary efficiency drivers. Especially among hedge funds, the desire for un-conflicted choice has fueled growth in broker-neutral electronic platforms that connect to a broad network of brokers, functionality algorithms and counterparties.

From hedge fund traders looking for an edge, to long-only asset managers that use options to manage risk, electronic trading is fueling access to the U.S. options marketplace. As the industry evolves and trading options becomes even more commonplace for the institutional investor, platforms that offer the buy side choice, access and sophisticated trading tools will succeed along with the market itself.

Moscow Exchange and Eurex to cooperate on FX trading

Moscow Exchange and Eurex to cooperate on FX trading

First Published 21st August 2013

Next step in partnership between Moscow Exchange and Deutsche Börse Group/Futures on EUR-RUB and USD-RUB to trade on Eurex.

Moscow Exchange and Eurex, the derivatives arm of Deutsche Börse Group, have signed a cooperation agreement for the trading of foreign exchange (FX) derivatives. Through this new element of the partnership between Deutsche Börse and Moscow Exchange, Eurex Exchange will launch Euro/Russian Rouble and U.S. Dollar/Russian Rouble FX futures on its trading system in Q4 2013.

Alexander Afanasiev, Chief Executive Officer of Moscow Exchange, and Andreas Preuss, Deputy CEO of Deutsche Börse and CEO of Eurex, signed a cooperation agreement for the new derivatives products in Frankfurt/Main today. Both partners will also jointly promote the launch of these two FX futures.

“We continue to deepen our partnership with Deutsche Börse, and are working together closely to provide our market participants with new instruments. Today we agreed to launch Rouble FX futures in Frankfurt. This opens up exciting new trading and hedging opportunities for investors. Also, this autumn, Moscow Exchange will launch futures on five German blue chip stocks. Cross-listing arrangements between Deutsche Börse Group and Moscow Exchange allow our clients to build new trading strategies and better manage their risks. We believe that our joint initiatives with Deutsche Börse will strengthen national markets and facilitate the continued development of Frankfurt and Moscow as financial centers”, said Moscow Exchange CEO Alexander Afanasiev.

“We are very pleased to have reached the next milestone of our partnership. This new cooperation fits perfectly into our goal to constantly expand our product offering as it will complement our planned FX product suite”, said Andreas Preuss, Deputy CEO, Deutsche Börse and CEO, Eurex.

Eurex will launch FX futures and options for six currency pairs on 7 October 2013. According to today’s agreement, Eurex’s product suite will be complemented with cash-settled futures for both Euro/Russian Rouble and U.S. Dollar/Russian Rouble currency pairs in Q4 2013. Upon expiry, Eurex’s Rouble futures will be settled using settlement prices provided by Moscow Exchange. This procedure is intended to reinforce the integrity of the futures contracts and provide investors with confidence that the settlement price is both fair and accurate.

In Q2 2013, the average daily volume for both products on the Moscow Exchange amounted to over 2 million contracts with a notional value of US$2.1 bn. In 2012, U.S. Dollar/Russian Rouble futures were the third most popular foreign exchange futures contract globally among traded currency futures, according to the Futures Industry Association.

CloudMargin launches cloud-based collateral management tech

CloudMargin launches cloud-based collateral management tech

Source: CloudMargin Limited

CloudMargin Limited, a London-based specialist collateral management software developer, has today launched a new, cost-effective approach to OTC derivatives collateral management for the buy-side.

“Until now, much of the buy-side had been priced out of having a dedicated collateral management platform and had no viable alternative to spreadsheets,” commented Andy Davies, co-founder and CEO of CloudMargin. “I am thrilled that CloudMargin’s innovative approach and use of the latest cloud-computing technology means we can offer a full featured, full-cycle collateral and margin management platform that’s well within the reach of even the smallest buy-side firm.”

CloudMargin supports the full process of collateral and margin management, from storing CSA parameters through calculating and issuing margin calls to handling disputes, selecting eligible collateral and instructing market movements. Real-time reporting and a unique dashboard bring a new level of oversight. Furthermore, CloudMargin cleverly supports the drive towards CCP mandated by Dodd-Frank and EMIR, giving a harmonized view of bilateral and cleared derivatives and a simple yet controlled process.

CloudMargin will be bringing this new approach to a broad spectrum of buy-side firms, from hedge-funds and asset managers, pension fund managers and insurance companies through to corporate treasury departments and energy firms. All of these are seeing collateral volumes rocket and operational complexity soar while at the same time internal and external scrutiny over the collateral process has never been higher.

Even for firms below the threshold for central clearing, regulatory changes under Dodd-Frank and EMIR are stretching manual processes and the use of spreadsheets to breaking point.

CloudMargin gives the buy-side an alternative to spreadsheets so they can finally have a secure, controlled, efficient and cost-effective collateral management operation. 

Eurex squares up to CME as swaps battle moves to FX (from

Eurex squares up to CME as swaps battle moves to FX

22 Aug 2013 Updated at 12:49 GMT

With much of the debate around new opportunities for European market operators in swaps currently surrounding interest rate products, CME Group must have thought its strategy of targeting foreign exchange was a relatively safe bet.

Eurex squares up to CME as swaps battle moves to FX

But plans announced yesterday by Deutsche Börse-owned derivatives exchange Eurex to launch FX derivatives on October 7, just under a month after the prospective launch of CME Europe, have given the Chicago-based futures exchange something to think about.

CME Group already has a large FX franchise in the US and wants to bolster its European presence with the launch of CME Europe, a London-based market that will initially offer trading in 30 currency pairs.

The futures bourse took the unusual step of announcing a launch date of September 9 before obtaining regulatory approval from the UK’s Financial Conduct Authority. According to Bob Ray, chief executive of CME Europe, the move was designed to offer a degree of certainty to help customer readiness.

CME’s plans were partly a response to a G20-led regulatory push to trade more derivatives on exchange and through central clearing. The rules created new opportunities for market operators to expand by offering new products that have traditionally been traded privately between banks. The rules will hit the majority of the FX derivatives market, which was worth $67.35 trillion at the end of 2012, according to the Bank for International Settlements.


By avoiding the fierce competition that will play out in the interest rate derivatives market for the time being, CME’s FX play made perfect sense. The exchange group already offers over 60 futures and more than 30 options in foreign exchange and has a ready-made European clearing house from which it has been clearing over-the-counter derivatives in Europe since 2011.

Ray told Financial News: “Around 23% of our total volume already comes from Europe and we already have over 40 years of experience in the FX market. We will be looking at ways to make changes to the contracts we offer on CME Europe that are more aligned with the region’s existing trading conventions.”

So what will Eurex bring to the table?

If CME has the asset class expertise, Eurex has the regional expertise.


FX represents new territory for Eurex, but its main strength is the dominant presence it already has in Europe, not just with its trading platform, but also with its integrated clearing house, Eurex Clearing.

During the last year, the German futures exchange has responded to the regulatory overhaul by encroaching on the turf of its biggest competitors.

A spokesperson for Eurex said: “One of the drivers for our FX derivatives plans was the desire to offer trading services in as many asset classes as possible in light of the OTC derivatives reforms.”

Last November, Eurex started clearing interest rate swaps, directly targeting the dominance of LCH.Clearnet, the clearing house majority-owned by the London Stock Exchange Group that processes the vast majority of cleared interest rate swaps.


Then in June, Eurex renewed efforts to grab market share in short-term interest rates futures based on the Euribor benchmark, a product that has historically been dominated by NYSE Euronext’s Liffe.

In addition to the direct challenge to NYSE Liffe, Eurex’s push into short-term Euribor derivatives and interest rate swap clearing came at the same time as the launch of Nasdaq OMX’s NLX, the US exchange operator’s latest European foray. NLX offers the most popular long and short-term interest rate derivatives offered by both Liffe and Eurex, with the promise of post-trade cost savings by giving members the ability to offset collateral payments that are required under the new swaps rules.

Steve Grob, director of group strategy at trading technology vendor Fidessa, said: “We are entering a really interesting time in the European derivatives market and the regulations could finally spur some genuine competition in this space. However, I do wonder whether Eurex is simply testing the water by bringing the challenge to the CME. It’s a shame that we are seeing more lookalike products, as opposed to real innovation in the European derivatives market.”

Many believe the battle between Eurex and the CME will be won and lost at the clearing level, which is likely to comprise the biggest proportion of derivatives trading costs.

 Anecdotal evidence suggests market participants will want to spread their risk by connecting to more than one clearing house but that the need to manage costs will mean one is likely to be dominant.

One head of dealing said: “We ideally want three clearing houses per asset class to diversify risk and will play them off against each other to a certain extent, which will keep them on their toes.”

The Eurex spokesman added: “Ultimately, the market will decide who comes out on top but we are confident of being able to gain enough traction with our new FX service.”

–write to and follow on Twitter @anishpuaar


Derivatives top agenda for ASX chief (from

Derivatives top agenda for ASX chief

Michelle Price in Hong Kong

22 Aug 2013

The chief executive of the Australian Securities Exchange has said the company will focus on expanding its derivatives business over the next 12 months, as regulatory efforts to overhaul the global swaps market gather pace in Asia Pacific.

Derivatives top agenda for ASX chief

During the exchange’s annual results presentation this morning, ASX managing director and chief executive Elmer Funke Kupper said derivatives is “the business where the vast majority of our energy is going in 2014”. The exchange is looking to exploit new rules that will see over-the-counter trades pushed onto exchanges and through clearing houses.

Funke Kupper added: “In 2014 we will be focusing on the implications of the international regulations…International regulations create new business opportunities and they affect our clients as regulators demand that some products that are presently traded OTC are cleared. We are investing in new services that we are bringing to market to help our clients.”

His comments came as the ASX reported net profits of A$348 million ($313 million) for the 12 months to June 30, up 3% on the year-ago period. Revenues came in at A$617 million, up 1.1% on the preceding period.

The first six months of the year acted as a drag on ASX’s full-year performance as subdued trading activity and increased competition in the cash equities market resulted in lower fees from trading and information services. Revenues across both businesses fell 8% for the 12 months to June 30 on the year-ago period.


These declines were offset by a strong performance in ASX’s listings, technical services, and the derivatives franchises, revenues for which grew 5%, 10% and 5% respectively in the 12 months to the end of June, compared with the previous year.

The ASX is one of several bourses in the Asia-Pacific region ̶ including the Japan Exchange Group and the Singapore Exchange ̶ making a play for the region’s $42.6 trillion OTC derivatives market. The company has been building out its OTC clearing house and in July it completed a A$553 million capital-raise that will bring ASX Clear in line with international standards on capital levels at OTC clearing houses.

Funke Kupper described the capital raise as the “most important” development for ASX during the past 12 months and added that the ASX’s new interest rate swap clearing service would begin to clear its first interdealer swaps in coming weeks. The launch of client clearing will take place during the latter half of the year.

The exchange expanded its listed futures business with the launch of new electricity futures contracts in May and is set to launch new volatility futures contracts based on the VIX index, also known as the “fear” index, in October. It is also expanding into collateral services to help meet growing client demand for liquid assets.


–write to and follow on Twitter @michelleprice36

From theOTC Space – CDS Futures | Can This Pig Sing?

CDS Futures | Can This Pig Sing?

August 14, 2013 by pttmonitor 0 Comments

The $24.7 trillion Credit Default Swap market (2012 Gross Market Value, According to ISDA and BIS) is one of the last untapped exchange-traded derivatives markets.  The question remains is the market ripe for a CDS futures contract, or as Mark Twain famously put it, “Never Try To Teach A Pig To Sing.  It Wastes Your Time And Annoys The Pig.”  So, can this pig finally sing?

The InterContinentalExchange (ICE) believes it is the right time and launched a CDS Futures contract (Ticker: WIG) on June 17, 2013.  The contract is based on Markit’s liquid CDX.NA.IG 5Y series.  The contract is complementary to the current “on the run” OTC traded CDX.NA.IG 5Y swap as the futures contract is priced on the theoretical value of the next CDX.NA.IG series.  This “When Issued” structure creates an option valued on the next CDS series.  In other words, it is a vehicle to hedge near term macro-economic credit risk (as opposed to immediate term credit risk with an OTC swap).

The chart below shows trading in the Sep 13 CDS future.  Although less than impressive, it is important to look back to the introduction on US Treasury futures in 1976/1977 as a point of reference.


Initially, Treasury futures (and a sister GNMA future) were not a success.  When they finally launched, volumes were only a few hundred contracts per day.

Low volume on this new contract is not a surprise, given the “when issued” impact of the CDS future and the effect on final settlement.  Many counterparties may be on the sidelines until the new contract goes through the first final settlement.

Is Dodd-Frank & EMIR Equal To The End of Britton Woods?

OTC swaps and specifically CDS’ do not have a “Nixon Shock/end of gold standard” fracture with currency and inflationary volatility.  These waves of volatility served as the “tipping point” for currency and interest rate futures.  Like the currency markets of the early 1970’s, OTC CDS swaps are a custom forward market.  Thus, the CDS future is in many ways similar to currency futures as both vehicles create standard models for the exchange of counterparty risk.

As market forces will not drive the adoption of a CDS future, will regulation and regulatory pressures do it?  Title VII of Dodd Frank changed the execution, clearing, and capital structures of the CDS swap market.  Let’s take a look at changes in the OTC market as compared to the ICE futures.  First and foremost, margin and transaction costs are now highest for customized products and lowest for standardized exchange-traded products.

Category Bilateral Swaps OTC Cleared Futures
Liquidity Liquid Highest Liquidity Illiquid
Margin Highest, TBD Higher Lowest
Margin Calculations 10-day VaR 5-day VaR 2-day VaR
Transaction Costs Basel III Capital Requirements FCM and associated LSOC costs FCM Margin/Cost of Carry
Termination/Compression Intra-party and Compression Intra-party and Compression Exchange
Valuation and Reporting Intra-party Intra-party  & SEF Exchange

Dodd Frank, EMIR, and Basel III changed the rules but internal momentum is still hard to overcome.  Any OTC CDS futures development must be co-dependent with the existing OTC swap market.  Exchanges are the ultimate networked organization where liquidity begets liquidity.  Therefore, for the futures to gain liquidity, the following Tipping Point actions must occur simultaneously.

  1.  Outstanding rules and margins for non-cleared bi-lateral swaps must be completed and implemented.  This includes implementation of Category 3 participants in centralized swap clearing.
  2. Banks must decide (or be convinced as part of increased CDS market scrutiny) to utilize CDS futures.  This benefits banks on the Basel III capital requirements side and the overall CDS market in terms of transparency.
  3. For parties interested in hedging credit risk on a macro-level, substitution value of the CDS future must be greater than the disincentive of a new, riskier product.  In other words, the perceived opportunity cost of trading CDS futures is very high.

June 2013 was a volatile period.  Volatility was not just related to central bank intervention and QEIII discussions.  Operational volatility in the OTC market was the result of new rules and margins for Category 1 and 2 participants.  In hindsight, given the confusion around central clearing, market participants are still trying to adjust to the fluidity of new swap rules rather than eyeing a complementary credit risk solution.

In this context, it is important to not underestimate the gravitational pull of the existing swap market.  Traders, banks, and counterparties have underlying relationships with swap desks (and not necessarily with a futures counterpart).  Transacting with two desks lowers your relative importance in a market that depends on relationships.

So, can this pig sing?  Well, we don’t know yet.  Once the music director finishes writing the final score and the band makes an entrance, then we’ll know whether this little piggy has a market or this little piggy gets none.

Seth Berlin, Principal, Performance and Thinking Technologies

Seth Berlin is a Principal Strategist at Performance Thinking & Technologies (PTT).  PTT focuses on risk modeling, compliance, and investment operations for private funds.

Reuters – Swaps clients plan US bank exodus


NEW YORK, Aug 12 (IFR) – US banks are at risk of losing overseas swaps market share as European clients have begun making every effort to avoid getting caught up in costly cross-border derivatives rules that were finalised by the CFTC last month, and come into effect this October.

European hedge fund and asset managers are threatening to transfer their swaps trading activities away from branches of US banks and towards European competitor houses to ensure they avoid the reaches of Dodd-Frank, which mandates an array of costly compliance measures, including the central clearing of standardised over-the-counter derivatives.

Many European clients would rather ditch their US bank relationships than bear that cost – just one of the unintended consequences of bad rule-writing according to dealers.

“It’s the one rule that risks the most competitive disadvantage,” said a lawyer at a US dealer. “There’s no way these clients are going to clear with us at this stage.”

Swaps executed by a European client with the foreign branch of a US bank will be required to clear through a central counterparty starting on October 9 – the date that an exemption from compliance with the CFTC’s recently finalised cross-border guidance will expire.

US banks say the deadline is unreasonable and compliance will be near-impossible. And at least one of the CFTC commissioners sympathises.

“My frustration has consistently been with the Commission establishing arbitrary dates that we pluck out of thin air to establish compliance without asking, ‘is this possible?'” said CFTC commissioner Scott O’Malia.

“The cross-border guidance should have required notice and a comment period to find out if the time periods for compliance are adequate. We claim to be having a comment period but I suspect that anyone who does so will have their comments completely ignored.”

Conversely, the October clearing deadline comes two months before the CFTC forces US branches to comply with the rest of the agency’s transaction-level requirements, such as trade execution, documentation, and real-time public reporting.

“The CFTC is asking us to pull a rabbit out of a hat,” said an executive at the London branch of a US bank. “They have offered ‘substituted compliance’ but the European rules are not even done yet. Nobody in their right mind thinks we can demonstrate substituted compliance by the deadline.”



For end-user clients, mandatory clearing can be a costly business. Clients must negotiate and document relationships with clearing houses and clearing member banks, and are required to post initial margin against all swaps that are passed through the system.

The CFTC guidance provides that foreign branches of US banks could apply to substitute their home country compliance for US rules in cases such as these if the rules were considered “comparable and comprehensive”.

It is likely to be the longer-term answer for most European branches of US houses, but the European rules for clearing are not yet finalised, leaving nothing concrete for comparison.

Some banks are moving to plan B, which involves transferring all client relationships from their foreign branches to affiliates – a separate legal entity that would protect European funds from the clearing mandate.

But that would not be easy, considering that firms such as JP Morgan have more than 10,000 clients booked through their UK branches.

“There are a number of impediments; it’s very difficult to move clients to another legal entity. Plus, many of those affiliates have regulators of their own who will raise concerns about wholesale transfers of clients,” said the lawyer.



US banks say they have sent the Commission requests for an extension to the deadline, by way of no-action relief or some other format. Given the Commission’s penchant for issuing no-action relief – the agency has issued more than 100 in connection with Dodd-Frank to date, a pushback of the compliance date seems possible – if not likely.

If history is anything to go by, the CFTC is likely to keep the industry in suspense until the eleventh hour.

“There’s no rhyme or reason for how the no-actions are issued,” said O’Malia. “It creates a confusing ad hoc process that leaves a lot of people trying to understand a lot of moving parts when we are not following the Administrative Procedure Act. We’re using and abusing the no-action relief system.”

The development represents another trough in the often tumultuous process of aligning cross-border implementation of new rules for the OTC derivatives market between Europe and the US.

For the past two years, US banks have been warning that the CFTC’s hurried pace in implementing the rules of Dodd-Frank would put US dealers at a competitive disadvantage.

Just over a year ago, the agency issued proposals that would have forced branches of US banks to comply with all transaction-level requirements in July of this year.

But European entities and US lawmakers levied heavy criticism of CFTC chairman Gary Gensler’s approach to international harmonisation of derivatives rules.

In response, Gensler pledged closer co-ordination with European regulators in a joint statement with the EC’s internal market and services commissioner Michel Barnier just before the original proposals were due to take effect.

The scaled-back proposal reduced the CFTC’s powers in determining whether foreign regulations could be substituted for US rules and issued no-action relief for most requirements until European regulators could catch up.

But the proposal may still have over-reached, according to banks. Whether the US banks are able to move their clients over to affiliates in time or the agency issues a no-action relief remains to be seen, but for the moment banks are facing a significant cross-border dislocation.

CloudMargin – How Does it Work?

CloudMargin – How Does it Work?

When joining CloudMargin, Collateral agreements (e.g. an ISDA CSA) together with counterparty details are entered into CloudMargin either by the client or CloudMargin’s onboarding team.

Each day, clients either electronically transmit or securely upload their portfolio of derivatives and available inventory (if they want to make use of non-cash collateral) to CloudMargin. Within seconds, CloudMargin’s dashboard is updated to show the number of calls or recalls that need to be issued, the number of calls/recalls expected from counterparties and those portfolios that require no action. Reporting is instantly available to give that day’s funding predictions.

Calls and recalls are sent to counterparties with a click either by email or via one of the margin messaging platforms.

Incoming calls and recalls are validated against CloudMargin’s calculations, disputes are quickly identified.

Eligible cash or non-cash collateral to satisfy incoming calls are selected and valued.

After counterparty notification and agreement the movement is instructed either by email (e.g. to a custodian), XML (e.g. to an internal settlements system) or SWIFT MT2xx / MT5xx messages to the client’s own SWIFT gateway or bureau.

End of day reporting documents the activity and the final status of all portfolios or agreements.

Throughout the day, the CloudMargin dashboard gives very clear and real-time status information


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